Netflix, Social Media, and Regulation Fair Disclosure

Tonight’s Netflix ($NFLX: no positions) story is a pretty interesting one that will probably be symptomatic of a larger debate over the next several years. Here are the cliff notes:

Back in July, Netflix CEO Reed Hastings posted on his Facebook page that the company had achieved their first “billion hours streamed in a month” month. Hastings has over 200,000 Facebook followers. Thus, he considered the information to be widely and freely distributed. Netflix didn’t file an 8-k with the SEC containing this information, and now the SEC has served him with a Wells Notice.

We use blogging and social media, including Facebook, to communicate effectively with the public and our members.

In June we posted on our blog that our members were enjoying “nearly a billion hours per month” of Netflix, and people wrote about this. We did not also issue a press release or 8-K filing about this.

In early July, I publicly posted on Facebook to the over 200,000 of you who subscribe to me that our members had enjoyed over 1 billion hours in June, highlighting how strong our content was. There was press coverage as there are many reporters and bloggers among you, my public followers. Some of you re-posted my post. Again, we did not also issue a press release or file an 8-K about this.

SEC staff informed us yesterday that they are recommending that the SEC bring a civil action against us for my July 1 billion hour public post, asserting we violated “Reg FD”. This rule is designed to ensure that individual investors have equal access to information as large institutional investors, by prohibiting selective disclosure of material information. The SEC staff believes that I gave you all “material” investor information in my post and that we needed to instead release the June viewing fact “publicly” with an 8-K filing or press release.

I want to note a few things.

First, we think posting to over 200,000 people is very public, especially because many of my subscribers are reporters and bloggers…”

Now, this seems like a good time to remind everyone that I am not a lawyer – I’m a rational, sentient human being, which means that the law probably will confuse and anger me. Secondly, I would like to mention that I do not have a Facebook account. Finally, I would like to make this discussion about whether or not Hastings’ disclosure method was satisfactory, and avoid the debate of whether or not the information was even material in the first place. Hastings claims that they had already posted, on their blog, in the prior month that they were nearing a billion hours of streaming. He is hinting, I think, that the July Facebook announcement was thus not “material.” That’s an entirely different debate, and one that I am not especially interested in debating, even though I can certainly sympathize with it.

For the sake of this post, let’s just assume/pretend that the information disclosed (the achievement of 1 billion hours of streaming in the month) was material (even though it’s pretty easy to make a valid argument that it wasn’t material), and discuss the validity of Hastings’ disclosure method, as the growing infiltration of social media into our society will likely result in some material information being disclosed by some important people at some point in the near future, in my opinion? Ok? let’s go…

“Regulation FD (Fair Disclosure) is a new issuer disclosure rule that addresses selective disclosure. The regulation provides that when an issuer, or person acting on its behalf, discloses material nonpublic information to certain enumerated persons (in general, securities market professionals and holders of the issuer’s securities who may well trade on the basis of the information), it must make public disclosure of that information. The timing of the required public disclosure depends on whether the selective disclosure was intentional or non-intentional; for an intentional selective disclosure, the issuer must make public disclosure simultaneously; for a non-intentional disclosure, the issuer must make public disclosure promptly. Under the regulation, the required public disclosure may be made by filing or furnishing a Form 8-K, or by another method or combination of methods that is reasonably designed to effect broad, non-exclusionary distribution of the information to the public. “

Now, didn’t Hastings make a disclosure by a method that was reasonably designed to effect broad, non-exclusionary distribution of the information to the public? It sure seems like he did. I am quite confident in my claim that FAR fewer than 200,000 people read Netflix’s SEC filings on SEC.gov (anyone want to argue with that claim? I’m listening…).

However, I am sympathetic to one point in the “he didn’t do this correctly” camp: currently, I subscribe to RSS feeds for several companies that I’m interested in – getting notifications of their filings from SEC.gov. That is the spot where the filings are made, and it’s the one central place that an investor can go and assume that he will find any relevant material information for the companies he’s looking at. If a company can just blast out “public” information in any widely distributed manner, does that mean I have to follow Reed Hastings on Twitter, and Facebook, and his blog, and subscribe to any email newsletters he offers? To me, that seems like a slippery slope – I personally prefer one central place where we can rely on information to be published, and that place is currently SEC.gov. Having said that, I would point out that the SEC’s own Reg FD rule, per my rational human non-lawyer reading, doesn’t say that the info has to be published in an 8-k filed with the SEC.

So I’m kinda at a loss as to what the SEC’s beef is here. Was Hastings’ disclosure exclusionary? Was it not broad? Would the story be different if he had 2000 followers on Facebook instead of 200,000 followers? And this is where we get back to the “Was it even material at all?” question. When you sum it all up, it seems that the SEC is chasing the wrong ghosts here.

“It certainly violates the spirit of the law,” says securities attorney Andrew Stoltman, of the Stoltman Law Firm in Chicago. “In the minimum, it’s a gray area.”

Again, I’m not a lawyer, but it’s pretty damn clear to me that it does NOT violate the spirit of the law at all. One could argue that it violates the letter of the law, but as I’ve explained above, I don’t think I understand that argument either.

Let me hear your thoughts in the comments section – with the following caveat:

I expect a lot of people to say that this is a waste of the SEC’s time and money – I agree, but I’m looking for a more theoretical debate as we move towards a Facebook/Twitter/Stocktwits/Networked world: is Facebook a valid means of disseminating material information? Is Twitter? Is there a threshold for a number of followers where one can be considered to have distributed the information widely?

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